When states try to tax the rich

Jan 5, 2026

There is a proposed ballot initiative in California that aims to impose a one-time 5% wealth tax on billionaires who were California residents on January 1, 2026. The initiative needs 875K signatures to qualify for the November ballot — given it does not get blocked by courts. If Polymarket bets from January 4 are any guide, there is a 73% chance that it will make it to the ballot, and a 56% chance that it will become the law. If it does become the law, how would it impact California’s tax revenues?

The Legislative Analyst’s Office thinks it could lead to a temporary bump in tax revenues at the expense of longer run income tax revenues. That is probably a good guess. A state cannot stop people from leaving for another state with better tax benefits. Rich tax filers are often more mobile than the average person and can choose to exercise that mobility if they do not like their state’s tax policy. Or at least that is how the theory goes.

Let us look at a few examples as to what has happened in the recent past when states have tried to tax the rich. This is not an exhaustive list of examples. Write to me if you have more.

Maryland

In 2008, Maryland started taxing income in excess of $1M at 6.25% — up from 4.75%. In the first year that the new tax rate was in effect, Maryland saw a 29% drop in the number of tax returns with tax liability that reported income of more than $1M. Income tax revenue from $1M-plus tax bracket declined by $222M between 2007 and 2008 tax years. During this period, Maryland’s total income tax revenue dropped by $318M — a 5% decrease. The surtax expired at the end of 2010. The state’s income tax revenue started recovering in 2011.

There is a caveat here though. The Maryland surtax overlapped with the Great Recession, which lasted from December 2007 to June 2009. You could say that higher income filers were more impacted during the recession because a bigger portion of their incomes came from stocks. The S&P 500 index returned -37% in 2008 but went up every year from 2009 through 2017. However, Maryland’s tax revenue bottomed out in 2009 and as we will see below, Oregon’s in 2010 — both bottomed out midway through their surtax periods.

Oregon

Starting in 2009, Oregon increased the tax rates on joint-filer income between $250K and $500K to 10.8%, and to 11% for income above $500K. The previous top marginal rate was 9%. Oregon’s total income tax revenues dipped by $360M between 2008 and 2009 tax years — a 7% drop. The surtax expired at the end of 2011 and settled at a lower rate of 9.9% for joint-filer income above $250K. In 2012, Oregon’s income tax revenue recovered and then some.

You might note that both Maryland and Oregon had a surtax period of three years. Both states had enacted temporary measures to shore up short-term revenues and/or budget gaps. It is fair to say that they were not wildly successful. Let us see if we can say the same thing about Washington state, which has implemented a new tax that is not temporary.

Washington state

In 2023, Washington state enacted a 7% tax on capital gains in excess of $250K. The first year’s capital gains tax haul was $848M while people awaited a verdict on the constitutionality of the tax — Washington’s constitution prohibits graduated taxes on income. This tax haul was more than three times what the state had expected. In 2024, capital gains tax revenue declined 58% to $356M even as the S&P 500 climbed 23%. For now, the lesson is — set low expectations and you might succeed!

Tax filers are not sitting ducks

Tax filers, by and large, respond to changes in tax policies. Some filers are more able and willing to exercise their mobility. Freedom of movement across states is the right of every American in a way that movement across countries is not. As a result, states have less leverage than the federal government when it comes to taxation. States can still capture a portion of the utility (benefit) that residents get by living in that state. When states demand more, able and willing people reevaluate their utility and sometimes decide to move. That is why states have a mixed record, at best, of taxing the rich.